Islamic Finance – Europe’s key challenge, says Deutsche Bundesbank

Islamic Finance – Europe’s key challenge, says Deutsche Bundesbank

The global banking industry must start providing Sharia-compliant finance products to meet growing demand and to gain new customers, legislators must ensure a level playing field for Islamic finance, and European banking supervisors working with Basel II-derived rulings must ensure that the risk weights of Islam-compliant finance products are fair and correct.

Last week, Rudolf Böhmler, Executive Board member at Deutsche Bundesbank, told an audience at the 2nd Islamic Financial Services Forum, that Europe must accept the challenge of Islamic banking. Demand had skyrocketed – 25% of the world is now Muslim – and the banks had to accept that this demand was not only in the traditional high net-worth market but was being fuelled by the growth of the Muslim middle-classes in Europe and other Western financial areas.

Böhmler used the UK as an example to show how a market for Sharia finance products can also function in non-Muslim countries. He said “Back in 2004, the Islamic Bank of Britain obtained a licence from the Financial Services Authority (FSA), making it the first Sharia-compliant bank to open for business in the UK. Since then, the European Islamic Investment Bank has been established and numerous credit institutions (e.g. HSBC) have a so-called “Islamic window”. The British government’s efforts to create a level playing field for Islamic finance and conventional products have been successful in the City of London.” Böhmler said that countries must adapt their legal and taxation frameworks and remove or mitigate obstacles.

Capital adequacy rules also need to be adapted. Currently supervisors and Basel II are not very favourable in their allocation of risk weightings to Sharia banking products. This is often through the lack of supervisors’ experience of these products and needs to be investigated and rectified. Islamic banking is no riskier than any other business and risk weighting needs to reflect the true risk levels.

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